Sunday, 30 November 2014

In a discussion of George Osborne’s plans for the deficit, I suggested that - if we were to take them
seriously - they could only be rationalised as an attempt to fundamentally
reduce the size of the state. Chris Dillow, following Rick and Giles, seems to prefer the cock-up theory, whereby
the destruction of the state is an accidental result of an obsession with the
deficit. I’m afraid they are wrong - this is no accident.

I suspect we would not be having this discussion if we were
talking about the US. Indeed, Brad DeLong, in commenting on a different post where I ask why some academics so dislike
fiscal stimulus, says I’m trying so hard to be fair that I lose sight of the
ball. He asks “how can you not think it is all ideology on the other side ..”.
That was a discussion about academics, who you might hope were more objective
and less politically strategic than politicians.

So why do I think the sharp reduction in the size of the state in the UK is no
accident? The most obvious piece of evidence is how the deficit has been
reduced. Osborne originally planned an 80/20 split between cuts in spending and
increases in taxes. In practice, as Giles pointed out at the Resolution
Foundation’s meeting, deficit reduction has almost all been
about spending cuts, with almost nothing net on taxation (largely because of
the LibDem inspired increases in the personal allowance). If it really is all just
about the deficit, why the imbalance? As one time European Commissioner Olli
Rehn put it, in complaining that (initially) France was trying to comply with
Eurozone deficit rules by putting up taxes: “Budgetary discipline must come
from a reduction in public spending and not from new taxes”.

The argument I use in my earlier post is that there is no sound macroeconomic
case for a rapid reduction in the share of debt to GDP at a time when interest
rates are still at or near their lower bound and there are risks to the
recovery. So, if the macroeconomic argument for deficit reduction is unsound,
there has to be another motive. Chris turns that on its head. He says: “whereas
the arguments for austerity are plain daft - talk of the "nation's credit
card" is sub-literate drivel - arguments for shrinking the
state are at least reasonable.”
Why use daft arguments rather than reasonable arguments? If they want to reduce
the size of the state, why not just argue for that? Why use the deficit as a
cover?

Before I answer that, let me raise another question which
frequently arises. Why on earth has Ed Balls come to accept the austerity case?
As Tony Yates tweeted to him today: “why are you reluctant to point out that we *need* deficit stimulus
while monetary policy is limited by the zlb [etc]?” [Subsequent post here.] As Bill Keegan reminds us, this is the same Ed Balls that in
2010, while acknowledging that there should be a deficit reduction plan, said “but only once growth is fully secured
and over a markedly longer period than George Osborne is currently planning
…Just think if Clement Attlee’s government at the end of the second world war
had decided that the first priority was to reduce the debts built up during the
war – there would have been no money to fund the creation of the NHS, no money
to rebuild the railways and housing destroyed in the blitz, no money to fund
the expansion of the welfare state.”

The reason for this about turn is of course mediamacro, which is why I go on about it so
much. When the entire media jumps on your leader because he forgot the bit of
his speech where he mentions the deficit, as a politician you are bound to
conclude that the battle has been lost. It is not that journalists were wrong to
point out the omission - the problem was the presumption shared by nearly
everyone that this was a gaff because the deficit is in reality all important.
And please don’t say politicians who bow to this media pressure ‘lack courage’ - a
politician’s job is to win elections.

The cock-up argument could respond that somehow the government
has got trapped by its own rhetoric. It used the deficit line as an obvious
stick with which to beat the opposition, but it has somehow got out of control.
Except of course that Osborne did slow down/stop deficit reduction when it
looked like the recovery might not come before the election. He did not feel
trapped then.

Chris asks why there has been no media campaign to promote the
idea of a smaller state. He writes: “I'd encourage sympathetic journalists - of
which Osborne has many - to write about excessive or wasteful spending. I'd
commission management consultants and civil servants to show how to improve the
efficiency of each government department. And I'd find some economists to show
that a smaller state tends to promote growth.” But this misses a key point I
have often made about mediamacro. I do not believe (despite what some
commentators on my posts imagine) that the media can persuade people of
anything. In particular, they would find it very difficult to persuade people
we need a smaller state.

As I showed here, seven times as many people want higher
taxes and spending than want lower taxes and spending. People like their NHS,
they want resources put into state education, and pensions are also popular,
which is why these items tend to be protected or ring-fenced. It would be very
hard to get traction arguing that we should reduce spending on these items. As
Jeremy Warner, assistant editor of the Daily Telegraph, wrote: “The bottom line is that you can only
really make serious inroads into the size of the state during an economic
crisis. This may be pro-cyclical, but there is never any appetite for it in the
good times; it can only be done in the bad.”

While people are clear about their preferences for public
goods, they are not experts on macroeconomics. So when they are told that the
deficit has to be reduced - painful though that will be - then they think about
their own budgets and it makes sense. They remember the Eurozone crisis which
involved governments not being able to sell their debt. Media myths have to
come from half-truths.

Nor is it the case that the right has not helped prepare the
ground for replacing the state with the private sector where it can. The
neoliberal line is that the state is always slow and inefficient and the
private sector is always dynamic and innovative. It is a meme that is so
pervasive that it came as a shock to many when Mariana Mazzucato pointed out how much innovations like the
iphone depended on state funded research. Rather than being bureaucratic and
conservative, the state was often where the high risk innovation took place.
Equally welfare fraud happens and it offends people a lot, but that has been
shamelessly exploited in some quarters, a trend encouraged by the Chancellor himself.

The neoliberal force is strong with this government, and I
see no reason to believe that does not also apply to their Chancellor and his
macroeconomic policy.

Friday, 28 November 2014

One of the many things I enjoyed about the Resolution
Foundation meeting I talked about here was meeting for the first time people who
I have long enjoyed reading, including fellow bloggers Frances Coppola and
Steven Toft (Flip Chart Rick), recent blogger Giles Wilkes and Guardian
journalist Polly Toynbee. On the day of the meeting Polly Toynbee wrote a nice column on the attempts by the right wing press
to portray Labour as elitist and/or too intellectual and therefore ‘out of
touch’ with the concerns of ordinary people. That column has a sentence that is
so apt I’ll save it for the end of this post.

Readers from the US will be all too familiar with this tactic,
from the Gore-Bush campaign for example. A closely related ploy
is to argue that politicians who are not poor who advocate policies to help the
poor are somehow hypocrites (which of course tells us a great deal about the
ethics of those making that accusation). Of course attempts to use background,
income or character as evidence against a politician are not unique to the
right. Arguments that because Cameron and much of his circle went to Eton and therefore cannot represent ordinary people are
no better.

Indeed, as this article by New Statesman editor Jason Cowley
illustrates all too well, the left can easily tar their own leaders with a
similar brush. Here is a quote:

“Miliband is very much an old-style Hampstead socialist. He
doesn’t really understand the lower middle class or material aspiration. He
doesn’t understand Essex Man or Woman. Politics for him must seem at times like
an extended PPE seminar: elevated talk about political economy and the good
society.”

No evidence is presented that Miliband does not “really
understand the lower middle class or material aspiration”. That can only make
sense if it follows from him being “an old-style Hampstead socialist”. There is
no real difference between this and the articles in the right wing press about
which Polly Toynbee rightly complains.

Of course left and right are not symmetrical in one important
sense: power. The right control the media spotlight, and it is focused on
Miliband, such that every misfortune - self inflicted (HT Tim Harford) or otherwise -
becomes a reflection on Miliband’s character. So the SNP’s popularity, and the
likely loss of Labour seats there, is all down to Labour's Westminster elitism, and
nothing to do with a resurgence of Scottish nationalism which in turn is a
reaction against the current UK government. Voter defections from Labour to
UKIP are put down to an alleged Hampstead/Islington intellectual tone: never
mind that we have a governing party actually falling apart over an issue
crucial to the future of the country. A tweet of a house festooned with English
flags is further evidence of an alleged contempt for the working class, while
employing someone at the centre of government who was subsequently jailed for
being part of routine phone hacking is apparently not a reflection of anything.
In this situation, is it any wonder Miliband has bad personal poll ratings. [1]
It has ever been thus. Neil Kinnock, an eloquent and
passionate speaker with eminent working class credentials became at the hands of the media a “Welsh
windbag” who did not have the gravitas of a prime minister. The only recent
Labour leader not savaged by the press was Tony Blair, but only because Blair deliberately cultivated Murdoch, and had
policies that were (designed to be?) not threatening to the establishment of
which the press are a part, and who was famously relaxed about inequality and
the growing wealth of the 1%. But I digress.

In an FT article about a week ago, Bill Emmott - former
Economist editor - raised important issues about the role of the media in
portraying political leaders. It has a fantastic opening paragraph:

“Look carefully at the photos from Thursday’s by-election
victory of the UK Independence party in Rochester, or those of last month’s
Ukip victory in Clacton. Can you see that disembodied smile? No, this is not
Lewis Carroll’s Cheshire Cat; it is a Milanese mog. That feline grin represents
a dangerous trend in British politics, one that goes beyond our arguments about
immigration, the EU or globalisation, important though those are. It is the
smile of Silvio Berlusconi.”

According to polls,
our two most popular political leaders at the moment are Boris Johnson and
Nigel Farage. Emmott argues that their popularity comes from the same source as
with Berlusconi: they raise a smile, and no one looks too deeply at their
mistakes, flip flops or even lies. What Emmott does not explore explicitly is
why they are able to get away with things that would sink other politicians.
With Berlusconi the answer appeared straightforward - he owned a large part of
the media. But what Emmott is suggesting is that maybe ownership is not
crucial: if the media are prepared to give a leader as easy ride because they
are amusing and charming, we may end up with the same result.

You might think this could not happen here - the moment that
either Johnson or Farage get close to power the attitude of the media would
become more critical. That seems naive - how close do they need to get? The
focus of some parts of the media on background and individual character seems
to me part of the same trend, and it is not going to change before the
election. We already have a media environment where something like a tweet of a
house gets more media coverage than the impact of welfare reforms in driving
many to rely on food banks to survive, or worse.
It is an environment where on the day that Scotland is devolved substantial new
powers, Channel 4 news chooses to lead on what an ex-cabinet minister might
have said to a policeman in the heat of the moment. Those in the parts of the
media that do not have to follow a political line, but who make decisions about
what is newsworthy and what is not, need to reflect on what the impact of these
decisions might be.

In truth what a political leader is seen drinking, the quality
of their jokes, or even their actions in responding or not to the media, tell
us virtually nothing about what they will do if they gain power, and in whose
interest they will act. But we are not clueless. The sentence from Polly
Toynbee’s article that I wanted to leave until last was this: “By their
policies we know whose sides our politicians are on – whose interests they
champion.”

[1] When those who voted Labour in 2010 were asked by
YouGov whether Miliband would be up to the job of Prime Minister, 54% said yes
in early October, but only 34% said so in early November. Did that one month
reveal some serious flaw in his abilities as a future Prime Minister, or did
his poll ratings fall because the media were incessantly talking about his poor
ratings! These ratings are a convenient (because they are endogenous) device to
keep the spotlight focused on him. The same YouGov poll suggests voters would
be no more likely to vote Labour if Yvette Cooper or Ed Balls were leader, so
the idea that Miliband is a huge impediment holding Labour back seems fanciful.

Thursday, 27 November 2014

Paul Krugman says Keynes is slowly winning. Tyler Cowen says no, there is lots of evidence Keynes is
still losing. If this strikes you as slightly juvenile, I don’t blame you.
Squabbling over the relevance of some guy who died nearly 70 years ago does
make the academic discipline of macroeconomics seem rather pathetic.

Now, as you probably know, I’m not a neutral bystander in this
debate. However I have always thought it important to try and understand where
the other side is coming from. Leaving aside the debating points, what deep
down is the core of the other side’s beliefs? But before addressing that, we
need to be clear what we are arguing about. Let me single out three Keynesian
propositions.

1)Aggregate demand matters, at least in the short term
and in some circumstances (see 2) maybe longer.

2)There is such a thing as a liquidity trap, or
equivalently the fact that there is a zero lower bound to nominal interest
rates matters

3)At least some forms of fiscal policy changes will
impact on aggregate demand, and therefore (given 1), on output and employment.
Because the liquidity trap matters, when interest rates are at their zero lower
bound we should use fiscal policy as a stimulus tool, and we should not embark
on fiscal austerity unless we have no other choice.

If propositions (1) and (2) strike you as self evidently
correct, you might accuse me of drawing the lines in this debate in a biased
way. I would of course agree that they are correct, but I would also note that
there are large numbers of academic macroeconomists (don’t ask me how many) who
dispute one or both of these ideas. Tyler Cowen in the post cited above talks
about a ‘so-called’ liquidity trap in the context of the UK.

Many macroeconomists - particularly those involved in analysing
monetary policy - did think as recently as ten years ago that there was a broad
academic consensus behind both (1) and (2). I was one of them. There was talk
of the new neoclassical synthesis (pdf).
This idea that there was such a consensus fell apart when a number of prominent
academics objected to governments using fiscal stimulus in 2009.

This suggests (3) is at the heart of the dispute. However my
reason for including (1) and (2) is that if you accept these two points, point
(3) follows pretty automatically. I was careful in formulating (3) not to claim
that fiscal policy should become the only or main stimulus tool: exactly what
role it should play alongside Quantitative Easing or other forms of
‘unconventional’ monetary policy - including those analysed by Keynesian
macroeconomists - remains unclear and can be reasonably debated. As I have
noted before, the two sides are not symmetrical on this point: while most
Keynesians are happy for central banks to undertake various forms of
unconventional monetary policy, the aversion on the other side to using fiscal
policy seems more absolute.

It is here that I have a difficulty. It seems to me in a
mature, ideology free science we would be discussing - when in a liquidity trap
- the relative merits of alternative forms of monetary and fiscal stimulus. It
would also be generally agreed that, given the uncertainties involved with all
forms of unconventional monetary policy, now was not the time to undertake
austerity. But that is not the discussion we are having. Why not?

An easy answer is that it is all political or ideological. Just
as politicians can use fears about debt as a means of reducing the size of the
state, so antagonism against fiscal stimulus comes from the same source, or an ideological aversion to state intervention. That
in my view would be a sad conclusion to draw, but it may be naive to pretend
otherwise. As Mark Thoma often says, the problem is with macroeconomists rather
than macroeconomics.

I can think of two alternative explanations that might at least
apply to some anti-Keynesians. The first comes from thinking about the
importance of money to macroeconomics. Money is very important, and indeed you
could reasonably argue that the existence of money is critical to point (1)
above. The mistake - in my view - is to therefore feel that monetary policy has
to be the right way to stabilise the economy. It makes you want to believe that
(2) is not true. This seems to me to have nothing to do with ideology.

The second is historical. I suspect we would not even think of
questioning the central role of Keynesian ideas for macroeconomics today if it
had not been for the New Classical revolution in the 1970/80s. This revolution
was successful in the sense that it did change the way academic macroeconomics
was done (microfoundations and DSGE models). Most academic macroeconomists -
for better or worse - are deeply committed to that change. But the revolution
was opposed by many in the Keynesian consensus of that time, and so Keynesian
economics became associated with the old fashioned way of doing things. This
association was encouraged by many of the key revolutionaries themselves. We
now know, as a result of the development of New Keynesian economics, that there
is no necessary incompatibility between the microfoundations approach and
Keynesian ideas. However I suspect that, at least for some, the association of
fiscal policy with old-fashioned Keynesian ideas set down deep roots. It certainly
seems that some notable academics were surprised that New Keynesian models
actually provided strong support for the use of countercyclical fiscal policy
in a liquidity trap.

I should really stop there, but having started with Tyler
Cowen’s post, I really should say something about his comments on the UK. The
basic facts are very simple. We had significant fiscal contraction in financial
years 2010/11 and 2011/12, which then stopped or at least slowed significantly.
The UK recovery was erratic from 2010 to 2012, and only reached a steady pace in
2013. That is entirely consistent with the importance of fiscal policy in a
liquidity trap. (The OBR calculate that austerity reduced GDP growth by
1% in 2010/11, and by 1% in 2011/12, with little impact thereafter.) Quite why
the obvious fact that other things besides fiscal policy are important in
explaining growth in any year is thought to be an anti-Keynesian point I cannot
see. And if the case against Keynesian ideas rests on the incorrect forecast
once made by a prominent Keynesian then this is really scraping the barrel.

Wednesday, 26 November 2014

Yesterday I spoke at the Resolution Foundation’s launch of
their analysis of the UK political parties’ fiscal
plans post 2015. I believe this analysis shows two things very clearly. First,
there is potentially a large gap between the amount of austerity planned by the
two major parties. Second, George Osborne’s plans are scarcely credible. They
represent a shrinking of the UK state that is unprecedented and which in my view virtually no one wants.

I would add one other charge - Osborne's plans are illiterate in
macroeconomic terms. The UK economy desperately needs more growth. There
remains plenty of slack in the labour market, and real wages are continuing to
fall. This and the inflation numbers tell us that the problem comes from the
demand side. Yet monetary policy can do very little about this lack of demand,
because interest rates are at their lower bound and - judging the Bank’s
actions - the power of QE is largely spent. This is not a short term problem
that is sure to disappear in a year. The risks that world developments will make the
problem worse are real - as David Cameron has recently warned.

In this situation a Chancellor should not plan to reduce growth further. I have yet to come across a single macroeconomist who
argues that Osborne’s plans for renewed austerity will not in themselves reduce
aggregate demand. So doing this when the recovery could go much further but is
still fragile is just plain dumb. It is even dumber if you have done this once
before, in a very similar situation, and the risks I outlined above have indeed
materialised.

So why is the Chancellor proposing to make the same mistake twice? My problem is that I
cannot come up with a coherent macroeconomic explanation that fits his words
and deeds. So let me list three possible justifications and why each fails.

1)Debt must be reduced because the markets will punish us
otherwise

This is a plausible excuse for austerity in 2010, because of
what was happening in the Eurozone, but as an IMF evaluation has recently acknowledged, the Eurozone was a
false alarm which shifted policy in the wrong direction. There never was a
‘clear and present danger’ that the UK might become like Greece, and there
certainly is not that danger now.

The Chancellor must know full well that a more modest pace of
debt reduction from 2015 will not lead to any market panic. It might lead to
higher long term interest rates, but that will only be because the markets
expect additional growth from less fiscal contraction (and therefore an earlier
tightening of monetary policy), and that would be a good thing. There is no way
markets will react to a more modest pace of debt
reduction by starting to think the UK will default! He should know this because
he allowed a more modest pace of debt reduction from 2012 (see below), and the
markets did not blink an eyelid.

Some say we must reduce debt before the next major crisis. I
agree, but the time to reduce debt is when monetary policy can offset the
impact of fiscal contraction on demand. It would be a far greater disaster if
the next crisis came with interest rates still near their lower bound, and when
the recovery was incomplete, so the number one priority is growth, whatever
risks you want to avoid.

2)If debt reduction reduces growth, the Bank of England
will do whatever is necessary to put things right.

Once again, this argument had some supporters in 2010, partly
because the Bank appeared much too optimistic about the extent to which QE
could become a substitute for lower interest rates. Today most are a little
wiser. In theory, it might (and I stress might) be possible to replace lower
rates by QE this way, but QE is now a riskier policy, because we know so little
about its impact. So even if the Bank and Fed were still expanding QE, they
cannot know what effect it might have compared to cutting interest rates.
However neither central bank is expanding QE, even though inflation is well
below target and likely to remain so for some time. That suggests they believe
the impact of this policy is largely spent, or that additional expansion might
do more harm than good. Monetary policy has its limits, and it is a shame that more
central bankers do not admit the fiscal policy implications of this. But what
is clear is that no Chancellor today would assume that monetary policy is not
constrained by interest rates at their lower bound.

3)Fiscal contraction is actually expansionary

Hardly any macroeconomist believes this - the OBR for example
think austerity reduced growth by 1% in both 2010 and 2011 - but perhaps the
Chancellor thinks otherwise. If this was true, then his plans for more
austerity would make perfect sense. However I have two problems with this
rationalisation for his actions. First, I cannot find in his speeches a clear
articulation of this view. Second, it seems inconsistent with his actions (or
rather lack of actions) in 2012/3. Here is the OBR’s assessment of the cyclically
adjusted deficit both in the past and expected until 2015, taken from my presentation
to the Resolution Foundation meeting. [1]

UK Cyclically Adjusted Net Borrowing (OBR estimates)

The pace of austerity clearly changed in 2012. It does not
matter in this context why this happened. If the Chancellor thought getting
debt down quickly was all important to promoting growth, he should have changed
policy to bring deficit reduction back on track in 2012. To most economists it
is obvious why he did not do that - because additional austerity would have
hurt growth. But if the Chancellor believed fiscal contraction was
expansionary, the opposite logic would apply.

So I cannot think of any way to rationalise what the Chancellor
is planning in macroeconomic terms. But perhaps I’m looking for something that
does not exist. Perhaps he does not have a coherent economic framework. Instead
he has a clear political framework, which has so far been remarkably
successful. The goal is to reduce the size of the state, and because (with his
encouragement) mediamacro believes reducing the deficit is the number one
priority, he is using deficit reduction as a means to that end. However another
priority is to get re-elected, so deficit reduction has to take place at the
start of any parliament, so its impact on
growth has disappeared by the time of the next election. But this
explanation would imply we have a Chancellor that quite cynically puts the
welfare of the majority of the UK’s citizens at major risk for ideological and political ends, and
I do not think I have ever experienced a UK Chancellor (with possibly one exception) who has done that. But
as Sherlock Holmes famously said ...

[1] In this chart there are three horizontal lines.
‘Sustainability’ is the level of the deficit that is consistent with
maintaining a 80% debt to GDP ratio, assuming nominal GDP growth of 4%. The
Labour target line assumes public investment will be 1.5% of GDP. This chart
probably underestimates the gap between the austerity implications of Labour
and Conservative plans, because the former might be achieved later than the
latter, and because the latter also involve substantial tax cuts. For a much more detailed and independent evaluation of the different parties' plans, read the Resolution Foundation's study.

Sunday, 23 November 2014

The title of one of my recent posts was a bit of a cheat.
It was meant to surprise, because it contradicted the prevailing view, but the
post didn’t actually try to answer the question the title posed. This post does
try to assess whether a political party’s place on the left-right spectrum
might influence its macroeconomic competence.

It should be obvious that, for any individual country, looking
at some macro outcome (like growth) and drawing some conclusion can be
meaningless. For example, growth under Republican presidents has been far worse than under Democratic
presidents, but that could so easily be down to luck rather than judgement. To
make headway we need to think of mechanisms and particular instances when they
applied.

In the US, for example, there is a belief on the right that
cutting taxes will increase tax revenue, a belief that is also clearly wrong.
So you would expect Republican administrations that acted on that belief to run
up bigger budget deficits than their Democratic counterparts, and that seems to
be what they do. That may not be the whole story, but at least it is a
mechanism that seems to fit. However it seems like a story that is rather
specific to the US, at least for the moment.

Just now you could argue that parties of the right are more
prone to austerity, because they want a smaller state than those of the left,
and austerity can be used as a cover to undertake policies that reduce the size
of the state. In a situation where interest rates are stuck at zero that has
the damaging macroeconomic consequences that we are seeing today. However this
is a story that is specific to liquidity traps.

An alternative source could be different views about the
relative costs of inflation and unemployment. You might expect governments of
the left to have higher inflation and those of the right to have higher unemployment.
While that mechanism loses much of its force when you have independent central
banks, it can resurface in a liquidity trap.

A final left/right difference that might impact on
macroeconomic outcomes is different views on the need for state intervention.
Those on the right might favour less intervention, leading them to favour simple rules, and to argue against the use of fiscal policy for
macroeconomic stabilisation.

Is any of the above helpful in looking at UK policy since 1979?
I use this place and period as a case study because I am most familiar with it.
In the past I have talked about three major macroeconomic policy errors
over this period, all of which occurred when the Conservatives were in power.
However that alone proves nothing: Labour was in power for fewer years and
might have been lucky. [1]

The period starts with Margaret Thatcher and the brief
experiment with monetarism. Here you could use the inflation/unemployment
contrast - the policy succeeded in getting inflation down very rapidly, but at
high costs in terms of unemployment, which persisted because of
hysteresis effects. A secondary question is whether, given any particular
preferences between inflation and unemployment, the policy was inefficient
because it attempted to run monetary policy according to a simple rule which
failed. Many at the time argued it was, because it put far too much of the burden
of lost output on the traded sector, which in turn was because the policy
generated Dornbusch type overshooting effects (i.e. a large appreciation in the
exchange rate).

The 1990 recession can also be linked to left/right influences.
The rise in inflation that preceded the recession (and to some extent made it
necessary) was partly down to Nigel Lawson’s tax cuts. I have been told by one
insider that the key wish at the time was to cut the top rate of tax, but it
was felt that to do this alone would be politically damaging, so tax cuts were
made across the board. That was not the only reason for the late 80s boom -
there was also the decline in the aggregate savings ratio that in my view had a
great deal to do with financial deregulation - but it was a factor.

The macroeconomic failure that everyone knows about from that
period was the forced exit from the ERM in 1992, and that was costly because it
made monetary policy too tight beforehand. Although you could say fixing the
exchange rate is a simple rule that the right might prefer, that would be stretching
things: ERM entry was favoured by Labour as well (although with the notable
exception of Bryan Gould). According to my own and
colleagues analysis at the National Institute the entry
rate was too high, which might follow from a preference for low inflation,
although it could just have been a choice based on poor macroeconomic analysis.

Inflation targeting followed the ERM debacle, and it was
augmented by central bank independence at the start of the Labour government of
1997. One major decision that, if it had gone the other way, we might be
scoring as a major error would have been if the UK had joined the Euro in 2003.
I have argued that the decision not to was based on an
intelligent and well researched application of current academic knowledge
(subsequently vindicated by additional but related problems that academics did
not anticipate), rather than any left/right policy preference.

Which brings us to George Osborne. I have just finished the
first draft of a paper that appraises the coalition’s macroeconomic policy, and
an interesting question that arises from that is why the coalition went for
austerity despite the liquidity trap. While the 2010 Eurozone crisis might
explain the change of mind of the minority partners in the coalition, it does
not explain Conservative policy, which was against fiscal stimulus in 2009. If
you look at some of Osborne’s speeches (and I’m not sure there is much else to
go on), the rationale for austerity was a belief that monetary policy was
sufficient to stabilise the economy, even in a liquidity trap (see the second
part of this post). At the time that represented a minority
view amongst macroeconomists. It could be explained in left/right terms in
various ways: a dislike of additional state intervention, taking a risk that
would lead to higher unemployment rather than higher inflation, or a devious
way of reducing the size of the state.

So we have three major UK macroeconomic policy errors: the
monetarist experiment of Thatcher, ERM entry and exit (and the boom that
preceded it), and current austerity. In all three cases it is possible to link
these to some extent to right wing
political preferences. It may be equally possible to go back further and link
the increased inflation of the 1970s to a left wing dislike of unemployment,
but I cannot do that from memory alone so it would require some additional work
going over the detailed history of that period.

However one additional point strikes me. Two of these three
errors can be attributed to following a minority academic view. That monetarism
was a minority academic view in the UK in the early 1980s became clear with the
famous letter from 364 economists in 1981. In UK right wing mythology that
episode represents the triumph of Thatcher over the
academics. I have also noted that the Labour/Brown period perhaps
represented a high point in the influence of academic economists within
government, and the analysis behind the 2003 entry decision was an example of
that. A belief that fiscal policy is not required in a liquidity trap is a
minority academic view.

It may seem odd to some that those on the right might be more
disposed to ignore mainstream academic opinion within economics, but of course
academic economics can be described as the analysis of market failure. No one
looking at debate in the US would dispute that minority academic views, or a
more general anti-intellectualism, finds an easier home on the right than the
left at the moment. Of course you can also find anti-intellectualism on the
left - see here for a recent UK example - and my distant
memories of the UK in the mid 1970s suggest that during this period they might
have been at least as prevalent as those on the right. What may have happened
over the last few decades is that what is currently called the left has become
ideology light, and therefore more receptive to academic expertise and evidence
based policy.

[1] If you want to call the gradual liberalisation of financial
controls that facilitated the financial crisis a macroeconomic policy error
that would make four, but I do not think anyone would seriously argue that this occurred
under Labour because they were more predisposed to market liberalisation than
the Conservatives.

Thursday, 20 November 2014

I thought I’d use the improved ONS website to try and answer a
very specific and topical question. If UK GDP growth has been so good (OK, I’m
exaggerating) over the last two years, and the economy is growing faster than
the Eurozone and Japan, why are most people still worse off than before the
recession? [1]

The first reason is straightforward. A large amount of the
increase in GDP we have seen since 2007 is the result of there being more
people in the UK. The chart below plots real GDP and real GDP per capita, where
I’ve normalised the second series so it starts at the same point in 2007 Q1.
[2]

While the level of GDP in the second quarter of 2014 was well
past its 2007 peak, the level of GDP per head was below that peak. GDP per head
is a much better measure of how prosperous each individual person in the UK
feels. (Incidentally, GDP per head in the US and Japan in 2013 exceeded 2007
levels. UK levels in 2013 relative to 2007 were similar to the Eurozone, but
going up in the UK, down in the EZ.)

There are two other important differences between total GDP and
how prosperous consumers feel. The first is how GDP is distributed between
wages, profits and taxes. The chart below shows the shares of these three items
(plus an ‘other’ category that includes self-employment income) over the same
period.

The top line is the share of ‘wages’ (compensation of
employees) in GDP. Movements have not been dramatic, but this share is now
lower than in 2007. A major reason for this is straightforward: higher indirect
taxes. VAT was reduced in 2009, but restored in 2010, and raised again in 2011.
Austerity has played a part in reducing real incomes. You might think another
factor is changes in direct taxes and benefits, but as this recent post showed, cuts in taxes have largely offset
cuts in benefits on average (but not
for those in the lower quarter of the income distribution).

The second important factor is what economists call the terms
of trade. We buy many overseas goods, so if their price has been rising
relative to the price of goods produced in the UK, we will feel poorer. Here
the major change occurred in 2008, with the large depreciation in sterling,
although higher commodity prices will also have had an impact.

This leads to some data that is increasingly quoted in the
media, which is the average earnings index relative to the consumer price
index. People have been getting excited by the fact that the two measures are
now growing at roughly the same rate, and when you look at the time series from
2007 to today you can see why. (The most recent ASHE survey from the ONS is rather less
optimistic, with real earnings growth still falling.)

Real earnings were over 8% lower in 2014Q2 compared to their
average in 2007. This overstates how much poorer we are on average for various reasons, but poorer we certainly are. Real
disposable income per head was about 2.5% lower in 2013 than 2007. Consumption
per head in 2013 was also substantially lower than in 2007, and also lower than
it was in 2005 and 2006. [3] And if you think that was because 2007 was a debt
fuelled consumer boom, think again. In fact, according to the latest
data from the ONS, the savings ratio in 2013 was a little below its level in 2007.

So although GDP may be higher than before the recession, when
we take account of the fact that there are more people in the UK, government
takes more in indirect taxes, and import prices have risen much faster than the
price of UK output, we end up significantly poorer.

[1] This post in complimentary to this interesting Chris Giles article in the
FT.

[2] GDP is in £ million, 2011 prices. If you type ‘ONS UK GDP
per capita’ into Google, you go straight to the (new?) Economic Time Series
page on the ONS site - just scroll down for these series. (Alternatively go to
the ONS site, select ‘browse by theme - Economy’ and the link is at the bottom
right.) Most of the data in this post can be found there. I do have a request
though - can we have the index numbers for the average earnings data there too
please, with annual and quarterly averages as well as monthly? More generally,
anyone can derive percentage changes from a levels series, but you cannot do
the reverse accurately.

Wednesday, 19 November 2014

There has been some recent disquiet in the UK about politicians
before the election failing to offer voters a clear account of how they would
achieve their fiscal plans. The Financial Times has taken
the lead, but others have concurred. A point I have stressed is that each party’s aggregate fiscal plans are quite
different, even though Labour in particular seems to want to hide this fact. But the complaint I want to focus on in this post is about something different - it is about failing to make it clear how plans will be achieved in terms of detailed policy changes.

While I think journalists and bloggers are right to complain, I
think it is even more productive to suggest what can be done about it.
Politicians do what they think is most likely to get them votes. In a time of
austerity, they have calculated that any bonus they might get by being
transparent will be more than offset by votes they will lose from coming clean
on specific cuts or tax increases. This is hardly a unique UK phenomenon - the
phrase ‘magic asterisk’ comes from the US, and Paul Ryan managed to fool quite a few ‘serious people’ by deploying
it before the last US election. If the factors that enter this calculation do
not change, neither will the behaviour of politicians.

In 1996 I wrote a paper with the title of this post. It was the
first time I proposed setting up an independent fiscal institution, or fiscal
council, like the OBR. One of the few examples of such a body at the time came
from the Netherlands. Those who complain about lack of transparency on fiscal
matters before elections should really examine what happens today in that
country. There the Dutch equivalent to the OBR offers to cost the fiscal plans
of any opposition party before an election. They take up this offer, because
failing to do so would be seen as a clear sign that plans were not credible.
The detail that the Bureau
for Economic Policy Analysis (CPB) go into is extraordinary, as I
noted at the beginning of this post: here (pdf) is an example.

So in the Netherlands we have a situation where the fiscal
plans of each party before an election are transparent, detailed and
independently costed. There is no fiscal fudge. To use a bit of economics
jargon, it is a political economy equilibrium which each individual party finds
it too costly to depart from. In most other countries we have an alternative
equilibrium that involves plenty of fiscal fudge, from which it would be too
costly for any individual party to try and break. Is there something peculiar
about the Netherlands that means their set-up could not work elsewhere? I have
heard excuses along those lines, but none which I find convincing.

So how might we get from where we are now to
something like the Dutch example? Well it so happens that in the UK we have a unique opportunity
if Labour forms the next government. Ed Balls recently asked the OBR to cost
their post election plans, but this would involve an extension of the OBR’s
current mandate, and George Osborne did not want that to happen. Of course
political advantage was behind both the request and the refusal. However, given
the request, if Labour forms all or part of the next government, it will be
very difficult for them to reject extending the OBR’s remit in this way. Those
who complain about lack of fiscal transparency should help make sure this
happens. Of course the details of how the OBR might do this need to be worked
out, and it may not be appropriate to do it exactly as they do in the
Netherlands. But the UK also has another piece of good fortune on this front:
the previous director of the Dutch fiscal council, Coen Teulings, is currently a member of the
economics department at Cambridge, so is easily on hand to give advice. We
should not miss this opportunity to end fiscal fudge.

Tuesday, 18 November 2014

In his party conference speech, David Cameron did mention inequality.
He did not say, as Ed Miliband said recently (see postscript to this post): “This country is too unequal. And we
need to change it.” Instead he said “Under Labour, inequality widened. With us,
it’s narrowed.” So do the two quotes above mean that both major parties now aim
to reduce inequality?

Here is the evolution of two aggregate measures of UK income
inequality over time, as calculated by the IFS from this recent study.

The main change is the large increase in inequality that
occurred under Mrs Thatcher from 1979 to 1990. There was then a small tendency for
inequality to increase until around 2007, since when inequality has fallen. The
main reason for this recent fall is the decline in real wages over this period,
while benefits have remained more constant in real terms. The share of the top
1% also rose during the Thatcher period, but unlike the measure above continued
to rise sharply until around 1997/8. It then remained relatively stable until
around 2004, rose sharply until the financial crisis, when it fell back in
2010/11 to end 90s/early 00s levels. (For details, access the PSE database here.)

If the decline in real wages since the financial crisis has
reduced overall inequality, what impact has government fiscal changes had? In a
landmark report issued this week, Paola De Agostini,
John Hills and Holly Sutherland analyse who has gained and who has lost as a
result of the direct tax and transfer changes made by the coalition government.
(Indirect taxes are excluded.) One of the things I liked about the analysis is
that it attempted (with some success) to reconcile its own results with similar
analysis undertaken by the UK Treasury and the IFS.

The headline result is shown in this chart.

The black dots track who has gained and
who has lost as a result of the coalition’s changes to direct taxation and
benefits, including pensions. The poorest have lost out, while the main gains
have been in the middle of the top half of the income distribution. So while a
decline in real wages may have reduced inequality in the years following the
recession, government policy has attempted to move things in the opposite
direction. So perhaps what the Prime Minister should have said is “Under
Labour, inequality widened. With us, it’s narrowed, but we are doing what we
can to change that.”

There are many other interesting results from the study, but
let me mention just three here. The first is contained in the most right hand
black dot. Over the period in which the coalition has been in power, changes in
direct taxes and benefits have had no significant overall impact on incomes,
compared to what would have happened if indexation had run its normal course.
That means that the impact of benefit cuts in reducing the deficit has been
almost exactly offset by tax cuts.

The second told me something I should have realised about the
Treasury’s analysis of the distributional impact of budget measures. The
Treasury’s analysis is similar, but with one important difference - the biggest
losers in their figures are the top income decile. As the report shows, the
main reason for this is straightforward - the Treasury analysis starts from
January 2010, not (as in this report) from May 2010. Why does this make so much
difference? Because the new higher 50p tax rate introduced by Labour actually
started in April 2010. George Osborne subsequently reduced this to 45p. So the
Treasury’s figures show the top decile losing as a result of the top tax rate
going from 40p to 45p, while this study starts at the 50p the coalition
inherited.

The third bit of the analysis I wanted to mention was how these
numbers might change by 2019/20 under current plans. The broad picture remains
similar, but with one large question mark for the lowest decile, concerning the
introduction of the new Universal Credit (UC). One of the hopes for UC is that
it will increase the uptake of benefits. The report calculates that if everyone
who currently claims any one of the benefits UC replaces takes up UC, then UC will
lead to large (+3%) overall gains for the bottom decile. Whether this will
happen depends in part on the efficiency and manner in which it is introduced.

Sunday, 16 November 2014

This is a rather long
post about how one of the instruments of macroeconomic policy has been taken
away, and replaced by a fetish about government deficits. It is not technical.

The latest Bank of England forecast has inflation returning to the 2%
target by the end of 2017, which is
in three years time. That is an unusually long time to be away from target.
So what is the MPC proposing to do about this long lapse from target?
Absolutely nothing. Tony Yates goes through all the detail, but remains
mildly shocked. Much the same thing is happening in the US. In both countries
the main discussion point is not what to do about this prolonged target
undershoot, but instead when interest rates will rise. Two members of the MPC
are voting to raise rates now! [1]

Cue endless discussion about whether the Bank or Fed think
Quantitative Easing does not work anymore, or has become too dangerous to use,
or whether the target is really asymmetric - 1% is not as bad as 3%. [2] All
this is watched by a huge elephant in the room. We have a tried and tested
alternative means of getting output and inflation up besides monetary policy,
and that is called fiscal policy. We teach students of economics all about it -
at length. But in public it has become like the family’s guilty secret that no
one wants to talk about.

Once upon a time (in the 1950s, 60s and 70s) governments in the
US, UK and elsewhere routinely used both monetary and fiscal policy to manage
the economy. Governments did not stop using fiscal policy for this end because
it did not work. Instead they found, and economists generally agreed, that when exchange rates were not
fixed monetary policy was a rather more practical (and probably more efficient)
instrument to use. They certainly did not stop using it because it caused the
rise in inflation in the 1970s. That rise in inflation was the result of oil
price shocks, combined with in many countries real wage resistance by powerful
trade unions, and policy misjudgements involving both monetary and fiscal
policy.

When, in the previous paragraph, I wrote ‘economists generally
agreed’, I am talking about what could be described as the academic mainstream.
However there were also two important minority groups. One, and the less
influential, argued that the mainstream was wrong, and fiscal policy was better
than monetary policy at stabilising demand. The other, often among those
labelled monetarist, not only took the opposite view, but had a deep dislike of
using fiscal policy. For example, many believed its use would be abused by
politicians to increase the size of the state (and almost all in this group
wanted a smaller state). For some there was the ultimate fear that politicians
would run amok with their spending, which would force central banks to print
money, leading to hyperinflation - we can call this fear of fiscal dominance. However, as I noted
above, the rise in global inflation in the 1970s was not an example of fiscal
dominance. I shall use the label ultra-monetarist for this second group: ultra,
because it is not clear Friedman himself would be among this group.

These minorities aside, the mainstream consensus was that
monetary policy was the instrument of choice for managing demand and inflation,
but that fiscal policy was always there as a backstop. So, when Japan suffered
a major financial crisis and entered a liquidity trap (interest rates fell to
their Zero Lower Bound (ZLB)), the government used expansionary fiscal policy
as a means of moderating the recession’s impact. At the time the results seemed
disappointing, but following the experience of the Great Recession Japan’s
performance in the 1990s does not look so bad.

The key event that would eventually change things was the
creation of the Euro. For countries within the Eurozone, monetary policy was
set at the union level, so to control demand within each country fiscal policy
was the only instrument left. Unfortunately the influence of ultra-monetarists
within Germany had always been very strong, and for various reasons the
architecture of the Eurozone was heavily influenced by Germany. This
architecture essentially ignored the potential use of the fiscal instrument.
Instead the influence of monetarism led to what can best be described as deficit fetishism - an insistence
that budget deficits should be constrained whatever
the circumstances.

Within the Eurozone individual governments no longer had their
own central banks who could in extremis print money. The worry among the
ultra-monetarists who helped design the Eurozone architecture was that some
rogue union members would force fiscal dominance on the union as a whole, so
they put together fiscal rules that limited the size of budget deficits. This
was both unnecessary, and a mistake. It was unnecessary because the Eurozone
set up a completely independent central bank, and made fiscal dominance of that
Bank illegal. It was a mistake because it completely ignored the issue of
demand stabilisation for countries within the Eurozone - in practice it either
took away the fiscal instrument (in a recession) or discouraged its use (in a
boom [3]).

While the design of the Eurozone reflected the obsessions of
ultra-monetarists within Germany, in the rest of the world the academic
mainstream prevailed. So when the financial crisis hit, and interest rates fell
to the ZLB across the globe, governments in the UK and US again used fiscal
stimulus as a backup instrument to moderate the recession. The IMF, normally
advocates of fiscal rectitude, concurred. The policy worked. But two groups
were not happy. The ultra-monetarists of course, but also many politicians on the
right, whose main aim was to see a smaller state, and who saw deficit reduction
as a means to achieve that goal. Both groups began to warn of the dangers of
rising government debt, which was rising mainly because of the recession, but
also because of fiscal stimulus where that had been enacted.

What happened next was that the Eurozone struck back, although
not in a calculated way. It turned out that it did contain just the kind of
rogue state the architects had worried about: Greece. The fiscal rules failed
to prevent excessive Greek government borrowing. Did this lead to fiscal
dominance and hyperinflation in the Eurozone? - of course not, for reasons I
have already given. But it did lead governments in the Eurozone to make a fatal
mistake. What should have happened, and always does happen
to governments that borrow too much in a currency they cannot print, is that
Greece should have immediately defaulted on its debt. But instead Greece was
initially encouraged to borrow from other Eurozone governments, perhaps because
some countries worried that default might lead to contagion (the market would
turn on other countries), but perhaps also because default would have hit
commercial banks in the larger Eurozone countries who owned this Greek debt.

Eventually contagion happened anyway, and Greece was forced
into partial default, although not until it had taken the poison of loans from
other Eurozone countries which were conditional on crippling austerity. Equally
important was the impact that Greece had on the use of fiscal policy in the
rest of the world. Those ultra-monetarists and right wing politicians that had
been warning of a government debt crisis used the example of the Eurozone to
say that this proved them right. Many (but not all) economists in the
mainstream began to believe it was time to reverse the fiscal stimulus, as did
the IMF.

From that point on, the idea that you could - and when monetary
policy became ineffective should - use fiscal policy to stimulate the economy
became lost. Even in 2009 it had been a difficult policy to sell publicly: why
should government be increasing debt at a time that consumers and firms had to
reduce their own debt? For those who had not done an undergraduate economics
course (which included most political journalists), politicians of the right
who said that governments should act like prudent housewives appeared to be talking sense. Greece and the
subsequent Eurozone crisis just seemed to confirm this view. Deficit fetishism
became pervasive.

Of course this about turn was just what both ultra-monetarists
and politicians on the right wanted. The focus on government debt had an
additional advantage in certain influential quarters. What had started out as a
crisis caused by inadequate regulation of the financial sector began to appear as a crisis of the government’s
making, which if you worked in the financial sector which had just benefited
from a massive public subsidy was a bit of a relief. You could be really
cynical, and say that austerity made room for another big financial bailout
when the next financial crisis hit.

But those with a more objective perspective watched the years
after 2010 unfold with growing concern. There were no government debt crises in
the major economies outside the Eurozone - instead interest rates on government
debt fell to record lows. The market appeared desperate to lend governments
money. The debt crisis was confined to the Eurozone. However austerity within
the Eurozone, undertaken across the board and not just in the crisis economies,
did nothing to end the crisis. The crisis only ended when the ECB offered to
back the debt of the crisis countries. The offer alone was enough to halt the
crisis, and interest rates on periphery country debt started to fall
substantially. But austerity’s damage had been done, creating
a second Eurozone recession. The fiscal policy instrument works, even when you
use it in the wrong direction! Austerity delayed the UK’s recovery, and while
growth was solid in the US, austerity there too meant that the ground lost as a
result of the recession was not regained.

So those with a more objective perspective, including many in
the IMF, began to realise the fiscal policy reversal in 2010 had been a big
mistake. The world had been unduly influenced by the rather special
circumstances of the Eurozone. Furthermore within the Eurozone the crisis that
austerity had meant to solve had actually been solved by the actions of the
ECB. It began to look as if austerity - in perhaps a milder form - had only
been required in a few periphery Eurozone countries.

All this should have meant another policy switch, at least to
end fiscal austerity and perhaps to return to fiscal stimulus. But deficit
fetishism had taken hold. This was partly because it suited powerful political
interests, but it was also because it had become the pervasive view within the
media, a media that liked a simple story that ‘made sense’ to ordinary people.
Politicians who appeared to deviate from the new ‘mediamacro consensus’ of
deficit fetishism suffered as a consequence.

So as 2014 ends, we have at best an incomplete recovery and
inflation below targets, yet central banks are either not doing enough, or have
given up doing anything at all. A huge amount of ink is spilt about this. But
if central banks really do believe there is nothing much they can do, with a
very few exceptions they fail to say the obvious, which is that it is time to
use that other instrument, or at least to stop using it in the wrong direction.
Perhaps they think to say this would be ‘too political’. The media in the UK
and US continue to obsess about government deficits, even though it is now
clear to almost everyone with any expertise that there is no chance of a
government funding crisis, so the obsession is completely misplaced. Within the
Eurozone deficit fetishism has achieved the status of law!

There are some who say we cannot use the fiscal
instrument to help the recovery, and get inflation on target, because debt will
become a problem in 30 years time. It is as if a runner, who normally gets
their fuel from eating carbohydrates but has run out of energy in mid-race, is
denied a food with sugar (HT Peter Dorman) because a high sugar diet is bad
for you in the long term. Others in the Eurozone say we must stick to the
rules, because rules must be kept. But rules that create recessions with no
compensating benefits are bad rules, and should be changed. Rule makers can
make mistakes, and should learn from these mistakes. [4] It is perfectly possible to design rules that both
ensure long term fiscal discipline, but which do not throw away the fiscal
instrument when it is needed.

So every time someone writes something about what monetary
policy could or should do to get inflation back to target, they should say at
the outset that this goal could be achieved - in a more assured way - by a more
expansionary fiscal policy. Political journalists who presume that more
borrowing must be bad should get a severe telling off from their economist
colleagues. For one thing that should now be clear is that rising debt since
the recession has done no harm, but austerity policies that tried to tackle
rising debt have done considerable damage. The 2010 Eurozone crisis was a false
alarm. Macroeconomics needs to get its fiscal instrument back, and deficit
fetishism has to end, but this is being prevented by an alliance between the
political right, the ultra-monetarists, and I’m afraid the media itself.

[1] In the UK there is a certain irony here. When inflation was
above target in 2010-13, most of the MPC was brave enough to avoid raising
rates. Although they forecast that inflation would come back to 2% within two
years, this forecast was met with considerable skepticism. Three members of the
MPC in 2011 voted to follow their ECB colleagues and raise rates. Perhaps as a
result, the Treasury wrote a paper in 2013 which said that on occasions
like that (when inflation was above target in a recession) the MPC could be a
little more relaxed about the speed at which inflation returned to target. The
irony is that this latitude is being used (abused?) now, when inflation is
below target and we are still recovering from a recession.

[2] Maybe in the US the target is asymmetrical - but shouldn’t be - but in the UK it is symmetric
by law.

[3] In a boom, when fiscal policy should have been
contractionary, budget deficits were low as a result of the boom, so the rules
suggested no action was required.

[4] Equally those that lent money when they should not have
lent money have to accept that they made a mistake.

Friday, 14 November 2014

I cannot
resist quoting from this editorial in today’s Greek edition of the FT.

Greek government and Troika’s
austerity policy vindicated

Since unveiling its austerity
strategy to reduce its yawning budget deficit in 2010, the Greek government
together with the Eurozone’s Troika has faced immense pressure to change tack.
An alliance of Keynesian economists and opposition parties has accused them of
choking off growth. The prophets of doom predicted years of stagnation with
soaring unemployment and falling living standards.

After a run
of positive growth numbers this year, the Greek government and Troika have
reason to feel vindicated. They have won the political argument. True, the
Greek economy is still a quarter smaller than its pre-crisis peak. But the
current acceleration looks like the beginning of a sustained recovery. The
anti-austerians grumble that the upturn would have come earlier had the Greek
government and Troika eased up on the fiscal squeeze. This is impossible to
prove as economic history offers no counter-factuals. What we do know, however,
is that the critics overstated the obstacles standing in the way of a recovery.
Their position was too extreme and they have found themselves snookered.

OK, the FT here is the
Fictitious Times, but otherwise I have kept pretty close to the beginning of
this real Financial Times editorial about somewhere else. The numbers may be different,
but the reason why this editorial would be ridiculous are exactly the same as
why the original editorial was. And yes, I know I have complained about it a few times, but because the FT is a quality financial paper that
generally gets things right, and which other journalists look to for economic
expertise, it is important not to forget the occasional lapse from otherwise
high standards. And the FT are not the only respected economists who sometimes mistakenly treat growth from a deep recession as an
indicator of a successful policy.